I have been a day trader for over 12 years, and have been trading for over 16 years. The definition of a day trader is someone who attempts to profit by making rapid trades intraday. Day traders often close out all trades before the market closes, and do not hold any open positions overnight. Day traders will typically make use of leveraged/geared products to maximise profits from smaller price movements.
Day trading might sound quite exotic and interesting, an activity reserved for the risk takers and mavericks of the investment world. In fact, the opposite is more the case. Day trading is a very disciplined and highly repetitive activity. It requires routine, a routine that should lead to predictability and consistency. The following are my 6 habits of a highly successful day trader:
#1: Daily scanning
A day trader’s work begins before the market opens. You need to be fully up to speed with what has happened in global markets while your preferred exchange was closed. These changes in global markets will affect the opening of your market. In addition, you will need to scan for any company-specific news that could have an impact on opening share prices. This could encompass trading updates, production reports and financial results. Over the last few years it has also become imperative to follow social media news relating to financial markets. News often "breaks" on these platforms first, and shares can be very sensitive to rumours that may start on these platforms.
This goes hand in hand with your daily scanning. As a day trader, you will typically be watching anything between 10 to 30 shares at any given time. You would have needed to have done, and continue to do, research on those companies to find out what each is doing, what might affect them and who is running them. Having a calendar of any upcoming data events for each share is also vital. This calendar should also have dates and times of macro-economic data points, for example retail sales figures, that will affect share prices.
#3: Developing a strategy using the available tools
After you have laid the foundation with research, and done your daily scan, you then need to apply your trading strategy, making use of analytical tools such as charting software and other price monitoring analytical tools. The refining of a strategy can take years, and is the exclusive topic of a future article. The most important element of this strategy is that it is based on simple, solid, basic techniques, and these rules need to constantly reviewed as the strategy becomes more complex. If the base rules are forgotten, the entire strategy will ultimately fail.
#4: Setting goals
Every day trader should have their "number". This is the amount of profit you are wanting to make in a day. This number is unique for ever trader, and it is derived from various factors. These include risk appetite, other sources of income, and available disposable capital. The "number" might change as your circumstances change, and it might also need to be revisited if market conditions change so significantly that the profit is simply unattainable given the specific market conditions.
#5: Maintaining habits
Habits by definition are things we do repetitively. When it comes to trading habits, you need to consciously revisit your habits to make sure that the good ones are being followed and any bad ones that have developed need to be stopped.
#6: Evaluating yourself
Ultimately the success of your day trading will come out in the profits you make. However it helps to keep a diary of your trading events. This will allow you to revisit good and bad times during the process and evaluate what went right or wrong. Keeping a diary allows you to objectively look at what transpired when the emotion of the trade has subsided. Having a more unemotional review of the trade and its outcome allows you to make the necessary changes to improve on your day-trading strategy.
Day trading is definitely not for everyone, and it is by no means the only way to make money in financial markets. However, if you have the time and the inclination to become a day trader, it can be very rewarding.
Neville has been a full-time client portfolio manager since 2002. He has completed a Unisa degree in Economics, The Registered Persons Exams (RPE’s), JSE Equity Traders Exam, RE5 (representative), RE1 (Key Individual) and RE3 (Hedge Funds). He has traded in numerous dealing rooms across South Africa, and has 16 year’s experience, his primary focus is on short-term trading strategies using derivative instruments.